Economic outlook for Macedonia

An economic outlook for Macedonia from Maximilien Lambertson from The Economist Intelligence Unit, and Macedonia2025 Summit speaker.

Full-year 2017 and early 2018 saw economic growth stagnate, owing to the extended political crisis, which resulted in a sharp drop in investment and a contraction in real government consumption. However, private consumption growth was relatively steady supported by low inflation, employment growth and a slight pick-up in wage growth. Exports and imports also grew steadily, which was largely attributable to the trade activities of plants that have received foreign investment to boost export capacity.

The second quarter of 2018 finally saw a recovery in economic growth, with real GDP growing by 3.1% year on year, up from 0.1% growth in the first quarter and 0% in full-year 2017. The recovery in real GDP growth was driven by the external sector. Real exports of goods and services grew by 13.7% year on year in the second quarter, up from 10.6% in the first quarter and 9.2% in full-year 2017. Growth in merchandise exports was fuelled by steady demand from Germany (Macedonia’s largest export market) and by exports of electrical machinery and road vehicles. Services exports also grew strongly, driven by manufacturing, transport and travel services.

However, investment still failed to pick up in the second quarter. Despite the formation in May 2017 of a new government, efforts have focused mainly on implementing the name agreement with Greece in an effort to unblock Macedonia’s EU and NATO accession processes. As a result, government capital expenditure contracted by almost 50% year on year in the first half of 2018.

The few data available for the third quarter suggest that the pick-up in real GDP growth has been sustained. In July industrial production was driven by capital and durable consumer goods, suggesting that consumer and investor sentiment has improved. Net wage growth remained strong, at 6.2% year on year, up from 1.5% a year earlier, driven by minimum and public-sector wage increases. However, the unclear result of the September 30th referendum on the name agreement with Greece means that an early election is possible. This political uncertainty could prevent a further improvement in investor confidence and delay the resumption of public investment. However, exports will be supported by sustained demand from Germany and the broader euro zone.